The Honest Policy

Rental Insurance

What you don’t know won’t hurt you, right? Why ask the question if you can’t stand the answer? I just assumed I was going to be covered?

These are all phrases you hear when one speaks of uncertainty. When the subject of AirBnB comes up in any conversation, there is always a bit of excitement in the room. The excitement of leveraging your real-estate for additional gains and even being a host to visitors and meeting new people are all reasons to be in the business. As you review the AirBnB website for hosting responsibilities they have a great outline on how to be in the hosting business broken down by what you need to check, what you need to look up and who you need to check with for approval. Looks like they are providing you all the resources you need to be a great host. In general they are disclosing and transferring the risk to you. It’s your business, you figure it out. This can cause quite a bit of uncertainty. Let’s review how your risk is changing as we discuss the 3 basic segments of hosts and how your insurance policy may or may not respond. 

As you assume your insurance policy will protect your property and business liabilities, the underlying principle here is disclosure in all three segments. With every policy, there is an application or qualifying process to provide the correct type of policy for the type of risk, use and expected exposures. Unless you have disclosed you were in the hotel and vacation rental business there is a strong chance your policy was not underwritten for this type of use.  In some cases, your policy was not even written as a business policy, for example a homeowner policy. Disclosure is an important and powerful word in the world of insurance, even in a commercial policy. 

Looking at the first segment and probably the most obvious and intended candidates for the hosting services are the individual homeowners. As a homeowner, particularly the single family homeowner, there are very few if any regulations on how and with whom you live with. If you have a cottage in the back, it’s yours to use as you choose. Most homeowner’s policies will have limitations on home based business. In most cases, you can get a rider to allow your home to be your office for most non-invasive type of business use. Because the hosting business is not your typical use for the property and you may not have disclosed to your agent at the time the policy was placed, your policy will be of little value to you in the event of a problem with your guest. You will need to make some modifications. 

The second segment to review is apartment dwellers. Here it gets a bit tricky as the renter is governed by a rental agreement. Any standard rental lease will have a definition of use or intended use and typically excludes any subleasing to others. So legally they do not have the right to engage in this activity nor is it their right to decide on how to use your apartment building for their personal gains. As the property owner you may not be aware, or even if you are, of the short term rental activity taking place in your property. This does not relieve you of your liabilities of the host nor does it mean your carrier must provide coverage when a problem exists as a result of the hosting activities. Through your application process you disclosed how the property is being run. The term apartment building has a far different meaning than hotel, vacation rentals or short term leasing. All of these terms will disqualify your apartment building policy and put you in a different program with the premium associated with the risk. 

The last and probably the most risky segment is the property owner of a multi-unit apartment building engaged in hosting activities. Although you can rent and provide housing in any format you want, the problem is in the disclosure process with your insurance company. Very similar to our prior segment, the apartment dweller engaged in hosting, but in this case you the building owner are engaged in the process. You are fully aware of this activity and you choose to do so. If you placed a standard apartment policy for your property, there are questions as it relates to residential use. A 12 month lease is a very good indicator of an apartment building, even if the 12 month lease has been converted to a month to month, it originated as a 12 month lease. The rates for apartment building can vary based on limits and coverage and are written based on the standards of apartment use. By knowingly engaging in the short term rental market you are well beyond the scope of what you disclosed and have provided fraudulent information to your carrier. Fraud, the willful intent to deceive, is never covered in an insuring contract. There is very specific language regarding misrepresentation and the penalties can be unbearable and not limited to just cancelation of the policy, but canceling the policy since inception. The problems can compound quickly especially in the event of a fire loss. 

As part of the solution, AirBnB has recently provided a Host Protection Coverage and Host Guarantee policies for their hosts. However as you read the disclosures, you will see the exclusions in the personal liability are significant. A few of the exclusions from the web site are:

  • Accusations of slander, defamation of character, emotional distress.
  • Defects in a location, like drywall problems, mold, bed bugs, asbestos, or pollution.

These two items in whole or parts are commonly listed in any complaint filed against a landlord here in the bay area. Under your standard general liability policy, you would expect to have coverage in some of these areas, at least enough to trigger the policy for a reservation of rights and duty to defend. If you did not disclose your new hosting activities you may have a problem with a claim as a result of the guests. The worst case is your policy is canceled based on misrepresentation and you have no primary coverage and the AirBnB policies are excluding these causes of action as we know of today. You could be without coverage under any policy. 

Disclosure is an interesting and powerful word. In most cases it can cause you heartburn and discomfort and in many cases, the lack of disclosure, will cost you more than money can replace. However, in the insurance market place it is imperative this term exists. With full disclosure you have the best chance of placing the correct program at the best value. Trying to force a carrier to provide coverage for an item not disclosed is a costly event and in many cases you may be not successful.  In today’s marketplace, there are policies providing the correct type of insurance needed for hosting activity. Actually it has been around for years, vacation rental policies for example. The landlord of multi-unit apartment buildings engaged in hosting or short term rentals exist today as well. The pricing will certainly be higher than your most competitive apartment program, however the product does exist. As the insurance marketplace catches up with this increasing demand, supply will drive down the rates just as we have seen with other specialty insurance products, for example wrap or construction defects coverage that has now become much more affordable.  So, take the time to ask the tough questions. Work with your agent in getting the correct coverage for your use. AirBnB does a great job in disclosing what you need to do, what guidelines to follow and where to find the information and the transfer of risk through disclosure. You have the same opportunity here, work with your agent to source the correct policy for your future use. 

Commercial Coverage Insurance Agency, Risk Management and Advisory Services has been a proud member of the SFAA for over 10 years working with investment property owners, managers and lenders.  We are pleased to offer our unique AIM Process to all members.  Please call our office to set up a meeting with one of our Advisors. 415-436-9800

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